Maine Supreme Court Upholds Order Requiring Insurer to Pay Restitution and Civil Penalty Stemming From Deceptive Practices by its Agent

The pertinent facts are as follows. In 2007, a Bankers Life insurance agent met with a 75 year-old woman who had recently been treated for cancer to discuss issues related to Medicare, health and prescription insurance. These meetings resulted in the elderly woman purchasing three Bankers Life annuities. To purchase these annuities, the woman liquidated three certificates of deposit, sold General Electric stock and rolled over an IRA. The sales contained several irregularities: (1) a required summary of the woman’s financial situation failed to quantify many items, including debts; (2) the suitability of the IRA annuity rollover was questionable for several reasons (not the least of which was that the annuity would not mature until a time period after the woman’s life expectancy terminated); (3) mathematical considerations used to justify the recommendations were improperly compared, and omitted in part; (4) the timing of the stock sale was questionable given the substantial capital gains tax and the negative tax liability; and (5) the woman’s access to funds was diminished and delayed.

The Maine Superintendent of Insurance (which has oversight over insurance companies and agents that sell insurance and annuity products to the public) found the Bankers Life agent failed to evaluate the suitability of his recommendations, was incompetent, untrustworthy and financially irresponsible in his annuity sales, and made misleading comparisons between the woman’s existing investments and those offered by Bankers Life.  The Superintendent ordered Bankers Life to pay restitution and a $100,000 civil penalty stemming from these deceptive practices.

Bankers Life appealed to the Superior Court. The Superior Court affirmed the decision of the Superintendent. Bankers Life appealed to the Maine Supreme Court.

In Bankers Life and Casualty Company v Superintendent of Insurance, 2013 ME 17 (January 10, 2013), the Maine Supreme Court affirmed the Superintendent’s decision, finding the Superintendent did not abuse her discretion in imposing restitution and a civil penalty against Bankers Life.

The Bankers Life decision is significant in at least two respects. First, it seems that the Maine Bureau of Insurance has taken a keen interest in pursuing actions against insurers for unsuitable sales of annuities to the elderly. In all likelihood, this will be an ongoing trend, particularly given Maine's aging populations. Second, the decision highlights the challenge in overturning agency decisions. Under the applicable standard a court will reverse administrative fact findings by a state agency only if the decision "plainly compels a contrary result." That means that focus in defending such matters should be at the administrative level.

New York Times Shines Spotlight on “Mini-Madoffs”

by Michael S. Smith
On January 6, the New York Times ran a story on Philip Horn, a Wells Fargo financial adviser in the Los Angeles area who recently pleaded guilty to defrauding Wells Fargo and more than a dozen of his clients out of at least $732,000. 

Horn, described by clients as charismatic and outgoing, “a great guy and a straight shooter,” spent a good deal of his time at the upscale Braemar Country Club.  The club was a lucrative source of clients for Horn, as well as the scene of a tense, public confrontation with one of his defrauded investors.  It appears that Horn bilked numerous of his fellow club members out of sums rising into the six figures and perhaps beyond.

Though the Horn affair provides the article’s narrative hook, its true focus is on a much bigger issue: 

While Mr. Horn is a relatively minor player in the pantheon of financial fraud, his actions highlight the persistent problems with policing the industry, even after the wave of rules enacted since the collapse of Bernard L. Madoff’s giant Ponzi scheme in 2008 ... Every month, the Financial Industry Regulatory Authority, a Wall Street watchdog, penalizes more than 100 brokers for various actions, including unauthorized trading and fraudulent activities ….

Unfortunately, the Horn case and others like it show that financial fraud is alive and well in the post-Madoff era.  The SEC and other federal and state regulators have more than enough large-scale investigations to keep them busy.  As a result, relatively small-scale financial advisers like Horn who defraud their clients are often able to slip under the enforcement authorities’ radar for years.  

For more information, contact Preti Flaherty Attorney Michael S. Smith or visit Preti's Financial Services Practice Group page to learn more.

Massachusetts Quick to Crack Down on Crowdfunding

Crowdfunding, which allows smaller private companies to sell directly to investors, has recently come under fire in Massachusetts. Secretary of State William Galvin has filed fraud charges against two out-of-state oil and gas operations relative to their sale of unregistered securities to investors in Massachusetts.

In the first instance, Prodigy Oil and Gas LLC allegedly employed a cold-caller who had been found gulty of theft. Prodigy sold at least $464,000 in unregistered securities to one Massachusetts investor. In the second case, Synergy Oil LLC of Oklahoma allegedly sold $35,000 of unregistered securities to two investors.

Through the JOBS Act, signed into law April 5, 2012, small business and entrepreneurs will be able to sell equity (up to $1,000,000 annually) directly to investors to finance their business venture. Crowdfunding is technically not legal yet. Once it is allowed, it must occur on SEC- registered websites. The SEC has until 2014 to adopt rules relative to crowdfunding.

Would-be investors should heed the warning that Crowdfunding is not yet legal or regulated. Proceed at your peril.

 

Crowdfunding Isn't Legal Yet, Regulators Say

 

Crowdfunding Takes Early Hit in Massachusetts

 

Are Massachusetts Crowdfunding Actions a Sign of Things to Come?

 

Top Investor Threats of 2012

What were the top investor threats of 2012?  According to a speaker during the NASAA roundtable session at the November, 2012 annual meeting of the Public Investors Arbitration Bar Association, the top four new threats were:

1. Crowd funding / internet securities offerings
2. Inappropriate advice or practices by investment advisors
3. Scams involving self-directed IRAs to mask fraud
4. EB-5 investment for visa scams

The top six persistent threats were:

1. Gold / precious metals
2. Risky oil / gas drilling schemes
3. Promissory notes
4. Real estate investment schemes
5. Reg. D / Rule 506 private offerings
6. Unlicensed salespersons giving liquidation recommendations (for example, recommendations to sell stocks to buy a variable annuity by an insurance agent not licensed as an investment advisor or stockbroker)